What Is a Cross Default?

The basic meaning of cross default is that if a debtor under this contract defaults under another loan contract, it is also considered a default to this contract.

Cross default

The basic meaning of cross-default is:

Is a clause in a credit contract. The basic meaning of cross-default is:

Cross default means that if the debtor under the contract defaults under other contracts or similar transactions, such breach will also be considered as a breach of this contract, and the creditors of this contract can take corresponding contract relief measures against the debtor.

Cross-default clauses can effectively serve as an early warning, allowing the parties to judge the other party's ability to perform under this agreement based on the fact that the other party has failed to perform under other agreements. If the other party fails to perform under its other transaction, it is likely to fall into financial distress and the ability to perform becomes a question. The creditors of this agreement will have a strong tendency to terminate the transaction with the counterparty. At the same time, through the cross-default clause, Creditors under this agreement can participate in the negotiations of the other party due to breach of contract under other agreements, so that they will not be in a more disadvantaged position than other creditors.

The theoretical basis of cross-default clauses is mainly the anti-default system in Anglo-American law and the uneasy defense system in civil law.

According to the traditional civil law theory in civil law, after the contract is established, the deterioration of the property of the party who performs later may jeopardize the realization of the creditor's rights of the party who performed first. Before the guarantee, refuse to fulfill your debt. There must be two conditions for the right of defense to be disturbed: first, after the dual service contract is established, the property of the post-performing party deteriorates; second, the property of the post-performing party may be significantly reduced and it may be difficult to perform.

As for the expected breach of contract system, Articles 2 to 609 of the Uniform Commercial Code of the United States stipulate that when a party has reasonable grounds to believe that the other party cannot perform normally, it may request the other party in writing to provide sufficient guarantee of normal performance. Providing a sufficient guarantee of performance in accordance with the circumstances at a reasonable time not exceeding 30 days constitutes an implied breach of contract.

Comparing the two systems, we can see that they are still different in some respects.

First, the prerequisites are different. Anglo-American law's anticipated breach of contract system does not presuppose that the performance of the debts of the parties to the dual service contract is in the order in which they are performed. Regardless of whether the parties are obliged to perform the current or simultaneous performance, either party can terminate the performance of the contract and seek legal relief in accordance with the law . And one of the prerequisites for the exercise of the uneasy defense right in civil law is that the parties' performance order of debts is in order. Article 68 of China's Contract Law also upholds the premise of civil law's uneasy defense right.

Secondly, the reasons for application are different. According to civil law, the condition for exercising the right of uneasy defense is that the property of the other party is significantly reduced after the conclusion of the contract and there is a possibility that it will be difficult to treat the payment. The grounds for implied breach in Anglo-American law are not limited to the reduction of property, but also include the poor economic status of the debtor, bad business reputation, the debtor's behavior in preparing for and performing the performance, or the actual condition of the debtor indicates that the debtor There is a danger of breach of contract, etc.

Thirdly, on the issue of fault, the expected breach of contract system takes into account the subjective fault of the parties. The establishment of the right of uneasy defense in civil law does not require the other party's subjective fault, as long as its property is significantly reduced after the conclusion of the contract and the danger of difficult to treat the payment is caused, as to what causes it, it is not necessary to ask.

Finally, legal remedies are different. The anticipatory breach of contract system gives the observing party remedies such as termination of the contract or filing for compensation for breach of contract; while in civil law's uneasy defense system, the remedy for the party performing the advance is that the right holder can suspend the performance of the contract once the other party provides sufficient security , You should continue to fulfill your debts.

From the above comparative analysis of the two systems, several rules of the cross-default system are closer to the expected default system in Anglo-American law. Because the cross breach of contract system does not pay attention to and distinguish the first performer or the latter performer in the dual service contract; its focus is on the parties 'failure to perform under other transactions, agreements, and obligations, not the parties' property status. Moreover, the cross-default system has a more direct response to the defaulting party's non-performance in the system design, and directly grants the right to terminate the contract without the parties providing a performance guarantee.

The application of cross-default clauses is determined by the starting amount, the nature of the debt targeted, the nature of the default, the subject of default, etc. The differences in the rules set at each link will determine the difficulty of activating the actual cross-default clauses.

The starting amount of a default event is the most well-known change in cross-default clauses and is also called the minimum starting amount. Reaching or exceeding this limit constitutes a default and the cross-default clause is initiated.

With the extensive development of derivative transactions, more and more parties are engaged in derivative transactions. However, because derivative transactions are off-balance sheet business, if the parties' contractual obligations on debts rely too much on the representation of items in traditional balance sheets, they may not be able to Obligations under derivative transactions are included. Therefore, in the ISDA master agreement, derivative transactions can be explicitly included in the concept of "nature of debt"; the unpaid amount payable under derivative transactions is used as the debt under cross-default clauses.

As for what kind of breach of date leads to the launch of cross-terms, the theoretical community generally believes that it includes any non-performance, non-payment and any non-performance that can lead to accelerated maturity. One of the most common in practice is any non-performance that can lead to accelerated expiry. In general, the exercise of expedited maturity must be due to a non-performance by the party performing the contract obligations, and the non-performance status continues after the grace period. If the debts under other transactions are expedited to maturity, it usually indicates that the default of the debts is substantial, rather than technical negligence and other remediable reasons, so that the party's ability to perform the debts under this agreement is in doubt. . If there are some non-performances under other transactions, the creditor may immediately request expedited maturity, or may grant a grace period, negotiate with the other party, or even give up exercising this right. In the latter two cases, if the parties to the agreement want to protect their own interests, they must fight for the agreement. Accelerated expiry under the conditions of "May" or "Capable Of" can constitute a cross breach of this agreement. event.

The default subject of the cross-default clause is not limited to the debtor itself, but has been extended to affiliated companies, affiliated companies or credit supporters. This agreement is special because legally speaking, the parties' affiliated enterprises, affiliated enterprises, or guarantee providers are already completely independent third parties, regardless of whether there is a "blood relationship" in the economy, but they are completely independent in law. It seems that it is a bit far-fetched that the legal person of the company bears its own obligations with its own property, so it is a bit far-fetched that the performance of the parties under this transaction will be reduced due to the breach of other legal persons. However, this method of subject expansion is more common in financial transactions and is not limited to cross-default clauses. Taking the ISDA master agreement as an example, when referring to a party's breach of contract, it often uses the following description: "the party, any credit support provider of the party, any applicable specific agency of the party". This reflects the practice in financial transaction practice and the parties' concerns and vigilance on any event that may affect the other party's ability to perform. In some financial transaction agreements, the defaulting entity may also act as a trustee, receiver, liquidator, custodian, etc. acting in the name of one of the contracting parties. The specific definition of the defaulting subject in the ISDA master agreement should be specified by the parties in the annex to the "specific institution".

At the first glance, such an expansion of the breach subject will worry about whether there are relevant legal issues, such as whether there is a conflict with the "relativity of contract" theory in Anglo-American law. But a little analysis shows that this worry is unnecessary. The relativity of the contract in common law mainly refers to the fact that the third party cannot claim the contract's rights except the contracting parties; the parties to the contract cannot impose the contract's responsibility on the third party. That is, a contract cannot impose rights and obligations under the contract on someone other than the parties to the contract. In the case of cross-default clauses, the so-called extension of the default subject is only to take the fact that the default of certain subjects as stipulated in the contract is used as a sign or signal to trigger a default event of this agreement, and that's all. The establishment and adjustment of the entity's rights and obligations are still between the parties and do not exceed the contract. The parties are willing to link the termination of their contract with the occurrence of certain events. This is a matter between them and can be agreed on the basis of the principle of party autonomy.

Finally, the application of cross-default clauses also depends on a fact that has nothing to do with the law, that is, whether the parties have the ability and information sources to learn about the other party's breach of contract. Because the parties to the breach themselves will not expose their breach of information to the public at large, the privacy of the transaction is very strong, and it is often difficult for the outside world to know the counterparty's transaction information. The lack of information restricts the full use of cross-default provisions.